Impact, incidence and shifting of taxation.

---- 2019 (6 marks)

The concepts- impact of a tax, the incidence of a tax and tax shifting are used to distinguish
between direct and indirect taxes.
Impact of a tax: Impact of a tax is the first resting point of a tax. For example, when a tax is
imposed on the production (excise duty) of a commodity, it is paid by the manufacturer,
though the tax burden is shifted to the ultimate consumer later, added under the price of
the commodity. Here, the IMPACT is on the manufacturer, whereas the incidence is on the
consumer.
The impact of taxation, specifically the term impact, is used to define the point of the initial
burden of the tax*. It is common knowledge that tax* is divided among parties to spread
the burden of the amount. So, the party on whom the tax* is originally imposed is signified
by tax impact. For instance, when tax* is imposed on a good, say coffee, the manufacturer
bears the direct burden of that tax*. Therefore, the ‘impact of tax’ is on the coffee
manufacturer.

Tax shifting:  tax shifting is the activity of shifting the burden (payment) of a tax from one
person to another. For example, in the case of GST, the tax is shifted ultimately from the
producer to the consumer. The manufacturer SHIFTED the tax burden to the ultimate
consumer.
As the name suggests, it refers to the act of passing on the burden of tax* among involved
parties. Shifting can either be done from person to person or among two or more persons.
Leading on with the example mentioned above, when the coffee manufacturer shifts the
tax* burden to a coffee dealer/retailer by increasing the price, it represents the shifting of
tax*.
Shifting means the process of transfer, i.e., the passing of the tax from the one who first
pays it to the one who finally bears it. It is through this process of shifting that the incidence
of a tax comes finally to rest somewhere. The process of shifting may be slow or may be
only partially effective so that the burden of a tax may not fall entirely on the person, who is
intended to bear it.

Tax incidence: INCIDENCE is the final resting point of a tax burden. It shows ultimately who
bears the burden of the tax.
In the case of direct taxes like personal income tax, the impact of the tax is on the income-
earner, and similarly, he has to bear the incidence as well. Nobody will bear the burden of
the tax on his behalf. On the other hand, in the case of an indirect tax, some business firms
will be ready to bear a part of the tax (by giving a concession to the consumers) to enhance
the sale. In this case, there is a backward shifting of tax. Such shifting is not possible in the
case of personal income tax as the impact and incidence will be on the same person. So,
direct tax, is a tax whose burden cannot be shifted.
The term incidence relates to the final resting point of the tax*. In simple words, it is about
the one who bears the tax* burden eventually. For example, if the process of tax shifting
continues from the coffee dealer/retailer, the consumer will eventually bear the brunt of
taxes by paying a raised price for the product. Thus, the incidence of tax* is on the
consumer.
Distinguish between impact and incidence of tax
1. Impact refers to the initial burden of the tax, while incidence refers to the ultimate
burden of the tax.
2. Impact is at the point of imposition, incidence occurs at the point of settlement.
3. The impact of a tax falls upon the person fr6m whom the tax is collected and the
incidence rests on the person who pays it eventually
4. Impact may be shifted but incidence cannot. For, incidence is the end of the shifting
process. Sometimes, however, when no shifting is possible, as in the case of income tax or
such other direct taxes, the impact coincides with incidence on the same person.